There are three ways that veterinarians price their services and products; according to what the competition charges, or suggested fee guides, they do a nominal annual increase, or they guess. There are very few veterinary businesses that have a pricing strategy, but there is some comfort in that very few businesses do. According to a study by a large US consulting firm, Boston Consulting Group, less than 50% of large corporations have a specified plan for pricing, yet those that do enjoy greater profitability than those without i.
Pricing has become more important to veterinarians in the past few years with the increase in pricing knowledge that clients gain from web searches, and the proliferation of online pharmacies. Unfortunately, pricing awareness has tempted many veterinary businesses to compete on prices in order to keep and attract clients. We especially see this in new vet practices that hope to capture new clients by competing on prices, which in turn leads neighbouring practices to lower their prices thinking that they need to compete in this manner.
This pricing model of lowering prices to attract clients is called Penetration Pricing. We see it used by other businesses like Walmart and dollar stores, but its use in veterinary medicine carries significant risks that can not only affect the financial health of the business, but also negatively influence the delivery of quality medical care.
The financial impact on lowering prices is significant. If we look at the following examples, we can see the negative impact that lowering prices by 10% could have on a business.
If all other costs remain the same the business goes from having a profit of $50,000 to not having a profit at all. The real danger of price cutting is that it becomes a race to the bottom because someone is always willing to lower their price in a price war. Until recently Walmart owned the low price market of general merchandise because they have a powerful logistics system that allows them to buy and ship product to stores very cost-effectively. Unfortunately, when the recession hit the various dollar stores were able to offer even cheaper prices which led to Walmart losing market share and profit. Most veterinary practices operate very efficiently and there is very little waste in operating and labour costs. Basically, we all pay the same for veterinarians, support staff, medications, rent, equipment etc., so the only place we can make up for lost income is in our profit.
Another great example is in the smartphone market. Devises that use the free Google operating system like Samsung have over 80% of the global market share compared to Apple, yet the latter has over 92% of the profits. Apple doesn’t compete on price, rather it positions itself as a manufacturer of high-quality products. There is a lesson there.
Customers are typically very loyal and rarely leave a business over prices. This is particularly significant for established businesses that think they need to lower prices to compete. If these businesses are losing clients they should look at their customer service, and patient care first because deficiencies here will lead to client loss.
Newer veterinary practices will often open their businesses with cheaper prices than nearby practices hoping they will peel off enough clients from the competition. There are a couple of problems with this strategy. The first is that the clients they are attracting are price shoppers that are not loyal, and will switch to another vet as soon as they offer cheaper prices. The second problem is that the cheap price has positioned the business in the market that they are a low-end business. Pricing is a powerful symbol to consumers about the quality that they can expect to receive. Automobile brands are an obvious example of this. If one day, the cut-rate vet practice decides to increase prices they will face a lot of resistance from the current clients who are with them for the cheap prices, and also from potential clients because a reputation is hard to change overnight. A new pricing strategy does not translate into instant credibility.
A decrease in the quality of medical care delivered is the biggest hit a veterinary practice will face when they pursue a low price strategy. If we look back at our example of the effect of a 10% decrease it becomes obvious that lowered profits translate into less CE, less quality staff, and less diagnostic and therapeutic equipment. A vicious cycle begins when the quality of care is compromised as the business looks for other areas to cut costs further reducing the ability to offer excellent client and patient care thereby forcing more price cuts in order to keep the business afloat.
It doesn’t have to be this way. Instead of thinking about lowering prices to compete a better plan is to see where prices can be increased on products and services. Of course, there are services and products that are considered shopped items because clients do not see the added value in purchasing them from one business over another. We typically see this with vaccines, medications and food, but not with many of our professional services. This is an example of Price Elasticity. It is explained by the responsiveness of the demand for an item by its price. Something is price elastic when a small change in price results in significant demand. For example, raising the price of a medication or pet food leads to lower demand. On the other hand, there are some things that we can raise the price significantly and there is not a change in demand, because it is price inelastic.
Identifying price inelastic services and products we offered is an essential part of a pricing strategy. We know there are some things we sell that are price shopped, but not everything. Consider a grocery store in that dairy and bread products are very price elastic; people will shop for these staples based on price. To combat this grocery stores, place these items at the farthest corner from the entrance in the hope that the shopper will pick up more items with better profit margins on the way to their milk and bread purchases. The same principles can apply to a vet practice.
As the new year approaches gather some of your key staff to look at your price list and identify which items that appear to be price inelastic. Your receptionist and techs will be key to this exercise since they are the ones that deal with clients as they pay their bills, so they can tell you which items and prices get pushback from clients, and which ones don’t.
We have successfully used this method of price setting for several years. I am constantly surprised that each year we raise the price on some items by 10-20% and we don’t get pushback from clients at all. It makes us wish we had adjusted the prices years before.
If we go back to our examples on the effect of pricing on the bottom line and assume that overall, we raised prices by 3% prices we can see an additional $15,000 in profit for the year. Not a bad return for spending a couple of hours reviewing a price list.
Pricing strategies can become very complex as we explore bundling, or one-time discounts, or costing of services to determine optimal prices, for example. Yet we can find simple exercises to increase our profitability to ensure we deliver the best quality medical care and business financial health over a sustained period of time.